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Tuesday, June 30, 2009

The labor market is almost surely the key to this recovery; renewed income growth would allow households to spend (i.e., add to the C of Y = C + I + G + NX), while at the same time, save in order to mend overly indebted balance sheets. And the consumer is key to this recovery, as residential investment - usually a big driver of growth during the recovery - is likely to be sluggish for some time (see this VOX article on credit-less recoveries, hat tip reader Steve C.)

So lets analyze the claims numbers. The labor cycle is still in the "contracting" phase; and except for April 2009, massive job loss has helped to pull down wages and salaries since August 2008. Going forward, initial claims suggest that the job loss is likely to slow.

The chart illustrates the 4-week moving average of initial unemployment claims as reported by the Department of Labor. Robert Gordon (see Econbrowser post from April 2009) noticed a pattern that is quite evident in the chart above: for each recession, the 4-week moving average is a good predictor of the recession's end. We will see if that happens this time.

But there is another thing to note here as well: once claims do peak, they tend to fall rather quickly. Therefore, history suggests that claims should start to drop off sharply in the second half of 2009 (coming months).

On the other side of the fence sits the stock of claimants, or continued claims. There was a big hoopla a couple of weeks ago, pointing to the exhaustion rate or the final claims numbers as evidence that people were simply going without benefits and not employed, rather than actually finding work. This is not true - well the not finding work part might be - there are plenty of benefits to be had.

The chart illustrates the total uninsured on the regular state programs plus the emergency benefits program (EB) plus the emergency unemployment compensation program (EUC-2008). By including the number of people that are collecting benefits under the EB and EUC-2008 programs, the total stock of claimants tallies closer to 9 million rather than the 6.1 million(not seasonally adjusted) claiming under the regular program.

I had a talk with Scott Gibbons (the DOL contact on the release). Including the benefits from EB and EUC-2008, a person can claim unemployment insurance benefits for up to 79 weeks (around 1.5 years) depending on which state he/she resides and whether the claims are completed in 2009 or 2010. My point is: there is a pretty big safety net out there right now.

Of course, all of those people are searching for jobs. And the initial claims numbers support big payroll declines for probably months to come. 2009 is still going to be rocky, even if GDP growth returns in the second half of the year.

Monday, June 29, 2009

This is not a US-centric issue: the World's population is aging. The Census Bureau reported that the World's older population, 65 years or older, is expected to triple by 2050. In the US, the number of people 65 years and older is expected to exceed those 15 years and younger by 4 million by 2050. As a point of reference, the number of persons under 15 currently outnumber the older population by 60%. And by 2030, people aged 65 years and over are expected to account for 12% of the World's population, up from <8% now.

The chart illustrates the average annual growth rate of population by age through 2050, as projected by the Census Bureau (the data for World and age projections is listed here, while the data for the US population projections is listed here).

Hmm. Kind of makes you wonder what will happen to aggregate demand for goods and services as an increasing number of people retire, effectively switching from saving mode to dissaving (spending) mode. Price pressures?

Europe likely will continue to be the oldest region in the world: by 2050, 29 percent of its total population is projected to be 65 and older. On the other hand, sub-Saharan Africa is expected to remain the youngest region as a result of relatively higher fertility and, in some nations, the impact of HIV/AIDS. Only 5 percent of Africa’s population is projected to be 65 and older in 2050....There are four countries with 20 percent or more of their population 65 and older: Germany, Italy, Japan and Monaco. By 2030, 55 countries are expected to have at least one-in-five of their total population in this age category; by 2050, the number of countries could rise to more than 100.

Sunday, June 28, 2009

There have been 40 bank failures to date in 2009. This is 1.6 times the failures in all of 2008 (25); and still, more are hopefully to come. The consolidation is still meager compared to the S&L crisis in the 1980's and 1990's. Notice that it took over a decade for the S&L crisis to work through, peaking at 531 bank failures in 1989, but averaging 253 failures per year 1986-1993 (get a time series of bank failures here).

Note: You can find a complete list of bank failures at the FDIC's website here. Notice that roughly 20% of the bank failures in 2008 and 2009 have been in Georgia, or as Camden Fine says to the WSJ, "Georgia is basically the Chernobyl of banking right now; it's radioactive down there". And according to the Wall Street Journal, the failures in Georgia have only just begun:

During a recent meeting with Georgia bankers, Federal Deposit Insurance Corp. Chairman Sheila Bair asked Christopher Maddox, head of Peoples Bank in Winder, Ga., why Georgia had so many banks. "Ma'am, may I respectfully submit that the FDIC approved every one of the applications," he recalls replying.

Georgia's predicament also is the result of a rapid expansion of the banking industry. Many of the new banks were small, and as they jostled for slivers of the market, they often made risky loans in speculative markets such as commercial real estate.

That was exacerbated by Atlanta's housing expansion and a decentralized government structure of 159 counties, where tradition holds that "every county has its own bank," said Christopher Marinac, managing principal at FIG Partners, a bank-research firm in Atlanta.

The Bureau of Labor Statistics released its American Time Use Survey results for 2008. Here are a few charts illustrating some results from Table 1 and Table 5 of the release.

The average female spends 2.13 hours per day in household activities (housework, food preparation and cleanup, lawn and garden work, and household management), 2.99 hours working, and 0.28 hours on the phone.

Note that these statistics represent the entire population aged 15 and older, employed plus all others (retired, not employed, etc.). The statistics, therefore, may not represent the "average" as one would have thought. For example, the average female's time spent at work-related activities, 2.99 hours, is dragged down by a large portion of the female population that does not work (teens, stay-at-home moms, elderly, etc.).

The average male spends 1.3 hours per day in household activities (housework, food preparation and cleanup, lawn and garden work, and household management), 4.52 hours working, and 0.14 hours on the phone.

By occupation, installation, maintenance, and repair employees work the longest hours on average.

You can see the breakdown of activities starting on page 8 of the release. Likewise, the BLS provides charts regarding last year's results here (which includes a chart illustrating type of activity by working population rather than the total population that is listed directly in the results tables of the 2008 release).

Friday, June 26, 2009

Glimmers of hope are starting to emerge in the hard data. Exports in Asia are forming a more decided bottom; but since the trough is -20% to -30% off over the year, the recovery may be a long haul (or it may not). By some measures, home values in the UK and the US are showing signs of stabilization, as the annual pace of decline slows. German business sentiment continues its ascent, moving past its 1993 low! In contrast, inflation maintains its steady descent; Japan is hard hit.

Overall, the global economy is finding its footing on the path toward stabilization.

Exports in Asia: looking a little better, but still WAY down over the year!

UK and US home values: signs of hope? Yes and no.

The US measure, the Federal Housing Finance Agency (used to be OFHEO) includes only conforming mortgage homes; and therefore, it doesn't capture the full market (there are other measures of home values, i.e., the S&P Case Shiller indices, that do not signal such a decided stabilization in home values). This is a weak market; and with foreclosures persisting and inventories high, prices are likely to fall a bit further.

According to the Ifo Institute for Economic Research, German business sentiment saw its fourth monthly gain! Here is an excerpt from the release:

The brightening was solely the result of the firms’ expectations – the pessimism of the survey participants with regard to the six-month business outlook has again weakened. Their dissatisfaction with the current business situation is just as strong as it was in May. The survey results confirm that the German economy is gradually stabilising.

Inflation remains in (or is nearing) the red for Singapore, Hong Kong, and poor Japan.

Thursday, June 25, 2009

Yesterday the Census released a rather positive durable goods orders report, which got lost in the shuffle of new home sales and FOMC reports. According to the Census:

New orders for manufactured durable goods in May increased $2.8 billion or 1.8 percent to $163.9 billion, the U.S. Census Bureau announced today. This was the third increase in the last four months and followed a 1.8 percent April increase. Excluding transportation, new orders increased 1.1 percent. Excluding defense, new orders also increased 1.4 percent.

But that is only part of the story. Capital spending on nondefense ex aircraft (which rids the data of the 68.1% monthly gain in nondefense aircraft and parts) got a hefty 4.8% bump. The implication is: that business investment in equipment and software may be stabilizing (about 8% of overall real GDP).

The chart illustrates the annual growth rate in total durable goods orders and the nondefense excluding capital goods orders (core capital spending). Both levels are down more than 20% over the year, but the core capital goods spending seems to be stabilizing. That's good, because core capital spending is a good monthly proxy for business capital spending in GDP.

The chart above illustrates the relationship between the annual growth of real core capital spending (deflated using the PPP for capital equipment and converted to quarters) and equipment and software business investment (part of the I in Y = C + I + G + NX). The polynomial relationship has an R^2 equal to 0.78; this suggests that a stabilization in business capital spending may be on the horizon.

I don't expect capital spending to boost GDP in Q2 , as actual shipments (filled orders) are still down over April and May. But the outlook for Q3 is now a (little) bit brighter.

Wednesday, June 24, 2009

Nobody ever said that a recession was easy; but it looks like the recovery is going to be a little rocky, too. Renewed optimism has brought about increasing mortgage rates and gas prices - both factors have the potential to cripple an economic recovery, as households are thrown back to the economic wolves.

In light of recent economic reports, major banks are revising their outlooks - the World Bank recently downgraded its US GDP growth outlook to -3.0% in 2009 and +1.8% in 2010, while the OECDnow expects US GDP growth to register -2.8% in 2009 and +0.9% in 2010. As such, the trajectory for 2010 growth seems to be very much up for debate.

To be sure, without stimulus coming from monetary policy (short term rates are near zero), further declines in home values expected, and a banking system that remains very much in flux, the recovery this time around will likely be much slower than the "V-shaped" recovery that would be expected given the depth of the recession. But who really knows?

In Q2 2008, the EIA expected overall consumption to grow over the year (which is the demand number of the EIA'sWorld Oil Balance estimates). Driven primarily by China and the developing world, 2008 net global consumption of crude oil was expected to rise by 1 million barrels per day in 2008. Oh, and the forecast for oil prices was somewhere in the range of $120-$130/barrel. But it didn't.

It fell by 0.46 million barrels per year. Here is how the 2008 consumption numbers actually played out (plus revisions to previous years).

The chart above illustrates the actual consumption growth through 2008, as estimated by the EIA. US demand completely retrenched, and China's oil consumption slowed dramatically. Oil prices fell to the floor, and recently, an uptick in China's global demand has renewed the market for crude.

Now, the US household is faced with rising gas prices...again! And according to a recent Gallup poll, Americans believe that gas prices are going back up to $3.39/gallon (national average is currently $2.69/gallon). Oh, man. Don't worry, the EIA forecasts oil to remain in the $67/barrel price-range, helping to cap gas prices at $2.33/gallon. But we know the EIA's track record...

You know, the one truth in this whole economic mess, is that nobody really knows. I tend to be more optimistic about the outlook, going against the wind that is the "deleveraging" view, which is is bringing down the "consensus" (see Martin Wolfe's chart of the week). Eventually, positive economic news will manifest itself into the economy, driving up demand in the opposite spiral that brought the economy down.

But again, who really knows? All we really have is a long list of banking crises to determine an "average" outcome - please see the research done by Reinhart and Rogoff, this paper in particular - but it's just a average, folks.

Tuesday, June 23, 2009

Where will the US saving rate go? 4%, 5%, 7%, 10%? Nobody knows. To be sure, the personal saving rate is rising...quickly; likewise, the saving rate in the UK, Canada, and Germany have been growing since 2008.

The wealth effects have been smaller in Germany and Canada (second chart below), but the impact on household saving has been very similar. This suggests that the wealth effect is (likely) a dominant determinant of saving patterns. Deleveraging may only be secondary, suggesting that renewed economic growth and a stabilization of asset values may cap the US saving rate below a German-style saving rate, 10%-12%.

The chart illustrates the household saving rate in the US, UK, Canada, and Germany (household saving as a % of disposable income). As households save, global consumption falls (unless income is rising, which we know to be untrue). Why are households saving? Rising unemployment? Deleveraging (reducing debt burden)? Tight credit standards? Loss in wealth?

Across each economy, the answer to all, except for "deleveraging", is most surely yes. The chart to the left compares the wealth effects in Canada and the US as the ratio of net-worth (nominal wealth) to disposable income (Source: Statistics Canada). The wealth effect in the US dwarfs that in Canada.

However, the saving rate is surging in both Canada and the US (see chart above). Likely, there has been a similar wealth effect in Germany (to a much lesser degree) and the UK.

Canadian and German households did not experience the bubble in debt accumulation as did the US and UK households, yet saving rates are rising across the board. The jury is still out on the future of the US saving rate.

To be sure, US households need to unwind the unsustainable debt accumulation in recent years. However, it is not clear to me that the second the labor market starts to improve, and credit standards loosen up further, that US households will not start spending again. All that is needed is a little income growth to generate some consumption growth alongside constant debt payments.

Monday, June 22, 2009

On the surface, the Fed's balance sheet indicates that the Fed has slowed down; total reserve bank credit extended in the week ending November 6, 2008 topped $2 trillion, and in the week ending June 17, 2009, it rested just under $2.1 trillion. However, the Fed is only shifting its focus from a liquidity policy (buffering bank reserves directly) to an asset purchase policy (quantitative easing). The balance sheet is expected to grow further.

The chart illustrates reserve bank credit by type since the beginning of the year. All of this information can be found using the Fed's weekly H.4.1 statement, Table 1. Notice how total reserve bank credit has stabilized at the $2 trillion mark. However, the composition of the portfolio is in flux - transitioning toward "securities held outright", including mortgage-backed securities (MBS) and direct Treasury obligations and away from direct lending (TAF, Repos, discount window).

In the week ending June 18, 2009, the Fed held the following securities on balance:

$566.9 billion in Treasury notes and bonds, up $154.5 billion since last year

$87.8 billion in agency bonds (Fannie Mae and Freddie Mac), up $87.8 billion since last year.

$455.3 billion in agency MBS, up $455.3 billion since last year.

The Fed has appropriated (does the Fed really need to "appropriate" printed money?) $1.25 billion to purchase agency MBS, $200 billion for agency bonds, and $300 billion for Treasuries. Compared to what has settled on balance, the Fed has promised to buy up to another $1.05 trillion more in MBS ($794.7 billion) agency bonds ($112.2 billion) and Treasuries ($145.5 billion). And that does not include the $1 trillion coming through the Term Asset Backed Securities Loan Facility (TALF), which has only just begun, lending $25.2 billion to date.

The Fed is still very much engaged in its quantitative easing policies, and the Federal Reserve Board members probably agree with Alan Blinder. Based on the announced purchase programs to date, the balance sheet could approach $4 trillion by the end of the year (note: it does not have to). If that happens, rates are unlikely to rise next year, as the Fed must unwind its new asset positions first!

Sunday, June 21, 2009

Consumption spending is the "wild card" for the economic outlook in many developed economies (and developing, too, i.e., China). Massive wealth loss has increased saving around the world; and in countries like the US, I still see a very big question mark as to how discrete will be the shift in saving behavior. Or better yet, how far will the deleveraging process go? Will saving remain at its current 5.7% of disposable income? Go to 7%? Or 10%?

The answer is that nobody really knows. Nevertheless, the effects of increased saving and/or reduced consumption on economic growth to date have been devastating. In the US, consumption took -2.75% and -2.99% from overall growth in Q3 and Q4 2008, respectively (see the BEA'scontributions to GDP growth table).

The drag coming from consumption is global. Below are several regional illustrations of the average annual retail sales growth rate (per month) for 2008 and 2009 to date. Out of the 27 countries listed below, 18 posted a positive average annual growth rate in 2008, while just 5 saw the same in 2009 ytd. Note: I do not have access to "good" data for Latin America. I urge you to visit Vitoria Saddi's blog, Latin America and Brazil - On Economics and Politics; she recently wrote a nice piece summing up the expansionary monetary policy across Latin America.

Note: For each graph below, the month listed in parenthesis next to the country name indicates the latest data point for retail sales.2008 is the average annual growth rate spanning the months January to December. 2009 is the average annual growth rate January to date.

Retail Sales in Asia: Australia and China holding on

Retail Sales in Western Europe: Ireland and Greece give the rest of Europe some perspective

Retail Sales in Emerging Europe: Latvia suffers, and Poland just barely holding on. The RGE Monitor had a nice article about Latvia and Emerging Europe not too long ago.

Retail Sales in the US and Canada: US consumers dropped off the map; both countries are showing signs of stabilization (the "not falling as quickly" story).

Looks bad - no wonder the consumer outlook is key to many economic futures.

Thursday, June 18, 2009

In light of today's initial claims report (I refer you to Edward Harrison's, Credit Writedowns, detailed take on the report), I wanted to compare the state claims reports from three states: Oklahoma, Texas, and Michigan.

Why Oklahoma and Texas? Well, Oklahoma City, Oklahoma and McAllen, Texas were among the top three (one and two, actually) employment performers of all 100 metropolitan areas from BrookingsMetroMonitor (see this post about the study of metropolitan areas). And Michigan, because that can serve as a proxy for the layoffs in the auto industry.

The chart illustrates the growth of average initial claims in 2009 over the average over 2007 and 2008 for each month through May (since the data is only available through June 6). Note: the data are not seasonally adjusted, and comparing the same month across years extracts the seasonalities. You can get state level data here.

I see two things in this chart. First, the layoffs in Michigan have perplexingly been less severe compared to those in Oklahoma and Texas. To be sure, the level of claims are larger in Michigan than in Texas and Oklahoma, but it is still striking that the surge has not been greater given the problems in the auto industry. Second, Oklahoma and Texas are showing a similar pattern to the national 4-week average - initial claims are receding - while Michigan is heating up.

The second point is important. Even though the auto industry is increasingly adding to the claims pool, the underlying trend is down.

The Bank of Japan today released its June report of economic and financial developments. Overall, it is consistent with the consensus view that the worst has passed. The BoJ finds it encouraging that export growth is stabilizing. Although exports in nominal terms have regressed 7-8 years, the decline seems to have stalled two consecutive months.

Overall, though, the economy is in bad shape: no spending, some policy, high unemplyoment ...and hopefully, the re-emergence of export growth.

Business fixed investment has declined substantially, reflecting the significantdeterioration in corporate profits.

Private consumption has weakened and housing investment has decreased, as the employment and income situation has become increasingly severe.

On the other hand, exports and production have begun to turn upward, after falling substantially.

What is expected: "In the coming months, Japan's economy is likely to show clearer evidence of leveling out over time."

Domestic private demand is likely to continue weakening with corporate profits and firms' funding conditions remaining severe and a worsening employment and income situation. (RW: domestic spending will continue to decline)

On the other hand, exports and production are expected to continue recovering, mainly due to progress in inventory adjustments both at home and abroad. (RW: hopefully, hopefully, exports will continue to improve)

Domestic corporate goods prices are likely to continue decreasing gradually for the time being, as supply-demand conditions for products are likely to remain slack. (RW: since there is no domestic demand, deflation is all but given)

This is not, and I repeat not, an encouraging report. Basically (and as you can see with my commentary to the side), there is no domestic spending whatsoever - firm nor consumer - to generate growth. Japan is completely dependent on the re-emergence of trade.

Just to give you an idea of how weak the economy is (aside from the precipitous decline in GDP), the unemployment rate marked 5% in April 2009, its highest level since 2003. But worse yet, the surge, 1% over the year, is the largest annual jump since 1954 (except in March, when it likewise posted a 1% change over the year). Oh man.

Wednesday, June 17, 2009

Brookings has developed a really cool MetroMonitor that will track the recession and recovery (likely a year after the recession ends) across America's 100 largest metropolitan areas. Here are some of their findings to date:

A few metropolitan areas are beginning to showing signs of economic recovery, although none has completely recovered. McAllen is the only metropolitan area that saw growth in both employment and output during the first quarter of 2009. Employment also rose in New Haven and Baton Rouge, while output also increased in Seattle, Austin, Virginia Beach, Washington, Richmond, San Jose, and Riverside. Still, none of these metro areas has yet returned to its pre-recession levels of employment or output.

There are two distinct "Manufacturing Belts." Most metro areas in Michigan and Ohio have experienced employment and output declines exceeding national averages. Several, including Dayton, Detroit, and Youngstown, began losing jobs two to three years earlier than the U.S. economy as a whole. At the same time, job losses have been more modest, and housing prices have risen slightly, in many Northeastern metro areas that have less auto-oriented manufacturing sectors (e.g., aerospace in Hartford, photonics in Rochester, plastics in Scranton).

There are also two distinct Sun Belts. Yet parts of the Southwest and Deep South—including metro areas in New Mexico, Texas, Oklahoma, Arkansas, and Louisiana—have performed relatively well, experiencing less severe job losses, relatively large wage gains, and modest home price increases. Specializations in energy and government, large amounts of federal hurricane recovery funding for the Gulf Coast, and smaller increases in housing prices during the early and mid-2000s may all help to account for their better performance.

Concentrations of jobs in "eds and meds" and government seem to have shielded some metro areas from dramatic job losses. Compared to a national employment decline of 3.7 percent from the fourth quarter of 2007 through the first quarter of 2009, metro areas with specializations in education and health care saw employment drop by an average of only 2.0 percent, and those specialized in government/military employment saw average job losses of 1.3 percent.

Tuesday, June 16, 2009

Global central banks have cut policy rates to near-zero levels (or in the case of the ECB, 1%), and in most cases, vowed to keep short-term rates low for some time (the Fed calls this an "extended period"). And as bond markets price inflation into the yield curve, the question that comes to my mind is: have central banks done "enough"? Perhaps for the financial markets, but not for the economy.

The chart illustrates the growth in asset holdings since the beginning of 2008 by the Federal Reserve (Fed), the Bank of England (BoE), and the European Central Bank (ECB) as of June 10, 2009 (if available). Each central bank has cut policy rate to the near-zero bound by increasing the liquidity in their respective banking systems; this is what drove the surge in assets across all three banks. However, the Fed and the BoE took the quantitative/credit easing path, which is why their asset bases are monstrous compared to that of the ECB.

But asset holdings have plateaued. The Fed, BoE, and ECB are in a mode of shifting portfolio composition rather than growing their balance sheets. To be sure, massive expansionary policy has helped to keep financial markets from collapsing, but a sense of urgency remains in the economic data...the worst has passed, but the economy still contracts.

There is a host of slack built into the system. In the US, the unemployment rate is 3.9% above its level just last year, and almost double its value at the beginning of this darned recession, 4.7%. Unemployment claims have likely peaked. But as James Kwak points out, they are not really falling; and unless there is a positive and extremely unexpected shock to the labor system that drops claims quickly, there will be slack building in the labor market for quite some time.

Perhaps central banks should shift focus again, making a real attempt to stimulate the economy (yes, in spite of the infamous liquidity trap).

I like what Scott Sumner at the MoneyIllusion blog has to say about furthering monetary stimulus:

There are three ways to make monetary policy more stimulative. Unfortunately the political viability of each approach is inversely related to its effectiveness. The most effective but least likely option would be for the Fed to commit to a NGDP target path, with level targeting (i.e. a growth path that they commit to catching up to if they fall short (and vice versa).) The second most effective option would be a modest interest penalty on excess reserves, perhaps 2%. The least effective option is quantitative easing. A bit of QE has been tried in the past few months, although less than many people realize. Again, there are far more effective monetary policy tools, but as the Fed seems unwilling to use them, it looks like QE is all we have for the moment.

Financial markets and the overall banking system are very different today than they were during Keynes' days. As Scott Sumner suggests, why not take advantage of these "alternative tools", like INTEREST ON RESERVES!

Monday, June 15, 2009

Canada.com reports: "Canada's recession, likely its deepest since the Great Depression, may also be its shortest." I have no idea what this means, as output loss appears to be rather benign compared to previous recessions. Many developed economies are posting their worst recessions in several decades, but Canada's 08-09 recession breaks just a 20-yr record as the worst recession since 1990.The chart illustrates Canada's four recessions since 1960 defined by the two consecutive quarters of negative GDP growth rule. The point 0 marks the first quarter of negative GDP growth, and the recovery consists of 2 quarters of positive growth following the end of the recession.

The 2008-2009 recession started in Q4 2008 as GDP fell an annualized 3.7% over the quarter (the first quarterly negative growth rate). The Bank of Montreal forecasts that the recession will end one year later in Q4 2009, when GDP grows a small annualized 1.5% (see the forecast here under the drop-down menu at the top of the web page). Compared to 81-83 and 90-91, the 08-09 recession looks more benign.

As we all know, the longer end of the Treasury yield curve has steepened markedly. Market participants became less gloomy about the economic outlook, and suddenly inflation angst took over. (It could also have to do with the Congressional Budget Office's upward revised budget projections released late in May, but that is another story.)

Mortgage rates in QE countries - the US and the UK - are rising behind government bond yields.

The chart illustrates fixed mortgage rates in the UK and the US. Both the UK and the US saw a drop in mortgage rates amid new quantitative easing policies (buying government bonds directly). However, both countries are likewise seeing rates rise amid less-horrible economic news, and a more benign outlook.

In some sense, it is good that the markets are pricing in inflation on an economic recovery. However, for potential homebuyers, they just lost potential homebuying power, with US mortgage rates rising an average of 50 basis from May's average to June's month to date average (see the date here). On Friday, Treasuries closed 9 basis down to 3.81%. And I imagine that the market got a little ahead of itself: Treasury yields at the longer end of the curve will fall.

However, the rising cost of borrowing to potential homebuyers is troubling, given the state of the housing market. The good news: markets are "healthy" enough to internalize the impact of rising mortgage rates. The bad news: prices will likely fall further on rising mortgage rates in order to stabilize affordability. The borrowing cost is the primary determinant of the "price of a home" rather than the actual price of the asset. If mortgage rates remain elevated, the term of the housing recovery likely gets pushed out.

Saturday, June 13, 2009

The Federal Reserve released its aggregate flow of funds report for Q1 2009. I will post further insight as I get into the nuts and bolts of the report, but here is an update of the household balance sheet as of March 31, 2009.

Household net worth, total assets minus liabilities, is falling at a 16.25% annual clip. The 2.6% decline from Q4 2008 to Q1 2009 is driven by a precipitous drop in the value of tangible assets (mostly housing but also durable goods), -2.3%, and financial assets (credit instruments, deposits, corporate equities, mutual funds, pension reserves, etc.), -2.2%. Liabilities fell 0.8%, mostly on a 2.9% reduction in consumer credit (mortgages went essentially unchanged). The Q1 annual decline in net-worth is smaller than that seen in Q4 2008, -17.4%.

The measure of housing valuation uses the Federal Housing Finance Agency's home price index, which showed a slowing quarterly rate of decline in Q1 2009, -0.5%, compared to that in Q4 2008, -3.3%. The S&P Case Shiller home price index (which includes mortgages that are not guaranteed by Fannie Mae and Freddie Mac) fell a quarterly 7.5% in Q1 2009, down from 7.4% in Q4 2008. Point: the loss in net-worth may be somewhat understated.

Another way to look at the effects of wealth destruction on consumption patterns (the so-called wealth effect) is by the ratio of net worth to disposable income.The chart illustrates wealth to disposable personal income from Q1 1951 to Q1 2009. Between 2005 and 2007, this ratio averaged a whopping 6.2. During the period 2005-2007, tangible asset values fell almost 1%, while financial assets grew a huge 16%! Liabilities likewise grew almost 18%, mostly on accumulated mortgage debt. Oh man.

At any rate, it is no wonder why households are reacting so vehemently to the liabilities side of the balance sheet right now: reducing consumption and increasing saving. Would a full recovery of asset markets repair household balance sheets enough to stabilize shifts in saving due to the wealth effect? Probably, but that may be a while. According to Reinhart and Rogoff, the average banking crisis real equity price cycle lasts an average 3.4 years (dropping 55%, a mark the S&P hit in February).

Friday, June 12, 2009

This week's economic reports show a global economy hanging in the balance: signs of stabilization are present, but the lagged economic reports still show no decided turning points. Exports are crashing - China and Canada, who depend on exports to fuel economic growth, are seeing export income fall at an increasing annual pace. Canada's housing market is suffering, but the decline is not even comparable to its southern neighbor. Unemployment rates surge as resource utilization falls precipitously, which is taking price inflation to negative territory. However, the recent uptick in oil - uptick! more like a rocket-powered boost - will relieve the drag on headline prices.

Exports continue to disappoint in China, Canada and the US. Foreign demand for economic growth is out for the count. From the WSJ:

"Although recent economic data offer increasing evidence of a recovering Chinese economy, the external environment remains weak, spelling ever more dependence on domestic demand for growth," Morgan Stanley economists said in a note after the data were issued Friday, predicting Beijing won't shift its monetary policy stance in the near term.

Canada's housing market is taking a serious tumble. However, one cannot compare this housing market recessionary response to the meltdown in the U.S. The Canada Housing and Mortgage Corporation, a bottom may be forming:

Housing starts are expected to improve throughout 2009 and over the next several years to gradually become more closely aligned to demographic demand, which is currently estimated at about 175,000 units per year.

And reality rears its ugly head as unemployment rates surge in the US, Canada, and Australia.

Wednesday, June 10, 2009

April exports of $121.1 billion and imports of $150.3 billion resulted in a goods and services deficit of $29.2 billion, up from $28.5 billion in March, revised. April exports were $2.8 billion less than March exports of $123.9 billion. April imports were $2.2 billion less than March imports of $152.5 billion.

Every broad category of international goods trade, except food and beverage exports and consumer goods imports, fell in April.

There's no way to spin this report: trade continues its relentless decline.

The chart illustrates the cumulative growth in nominal exports and imports since the beginning of the Great Recession. Over the entire period, the level of trade, as measured by exports, imports, and non-petroleum imports, is down 20-30%. These are nominal numbers, and there was growth the first half of 2008 on booming commodity prices. However, the sharp drop in global demand has quickly taken that away.

Although a falling dollar should help exports, the global economy is too weak to depend on that!

Tuesday, June 9, 2009

No really, if you want to read about California's constitution, the Economist writes a nice article here (this was before the budget ballot measures were voted down, but gives a nice overview of the problem(s)).

An interesting use of stimulus funds in Canada. The Harper Economic Action Plan (Canada's stimulus plan) announced that stimulus monies will be spent to help make meatpacking and processing facilities more competitive. From the Department of Finance:

The Harper Government’s Economic Action Plan is supporting the livestock sector by making meat packing and processing facilities more competitive and accessible to farmers across the country. Agriculture Minister Gerry Ritz along with Minister of National Revenue and Minister of State (Agriculture) Jean-Pierre Blackburn today announced that the three-year, $50-million Slaughter Improvement Program is now in place and will soon be accepting applications.

The sector "agriculture, forestry, fishing and hunting" accounted for just 2.3% of total (real) GDP output on average 2004-2008, and "animal production" is just 17.4% of that. I'd say that's about right, $50 million CAD, for this industry - I counted $56 billion by adding up the amounts at the Plan's homepage.

A paper in the Economic Letter at the San Francisco Fed (FRBSF) got a lot of media attention, suggesting that the recovery in the labor market will be slow:

The share of workers who have been laid off temporarily, rather than permanently, is at very low levels, and the number of workers who are involuntarily employed part-time is at historical highs. Both of these factors are likely to slow the recovery of the outflow rate over the course of the next several years.

But this is only half of the story; and I believe that these results are somewhat overstated. The other half of the story is on the establishment side of the report, which reports average workweek across industry.

At the Federal Reserve of Chicago (FRBC), Danial Aaronson argues that the labor fluctuations have been "normal" given the magnitude of the output gap (i.e., current rate of production is less than that with full utilization of resources) using previous recessions as a guide. He suggests that the average workweek, which is has declined precipitously to 33.1 hours per week, is holding up better than expected (given the output gap, of course). Finally, that firms are generally not hoarding labor; firms at the heart of the recession are firing at record levels.

Aaronson even suggests that anecdotal evidence points to the manufacturing sector as reducing hours in order to save jobs (i.e., hoarding labor). Specifically, they offer this:

Much of this reflects the nature of this recession, with the decline in residential housing happening early on, followed by the credit crisis and the fall in consumer demand. Labor market performance in other industries [outside of construction, financial services, and leisure and hospitality] has looked fairly typical for a recession of this size. That said, work force adjustment continues and is not fully reflected in the data through 2009:Q1. For instance, some more recent anecdotal evidence has noted further efforts to reduce hours in order to avoid additional layoffs in manufacturing.5

What this means to me is this: that the reduction in labor hours - voluntary or involuntary - is warranted. And that perhaps the surge in involuntary part-time employment (which may be holding up better than one would think) is suggested by the massive output gap. Productivity (see below) remains positive, suggesting that firms are generally not hoarding labor. Therefore, the recovery implied by the FRBSF paper may be slightly overstated.

Annual productivity growth (chart to left) has remained remarkably positive throughout the Great Recession! (In six of the last ten recessions, productivity growth turned negative, and the rest except for the '01 and '90 recessions, neared zero.) Since productivity growth has remained very positive, 1.9% over the year in Q1 2009, firms are firing at record rates; and perhaps they are firing more "coincidently" than in previous recessions.

However, this is untrue in manufacturing, where productivity growth is the lowest since the series was first measured in 1987, -3.2%over the year. To me, this suggests that non-manufacturing industries will be forced to hire once positive demand is established.

Monday, June 8, 2009

Here is a cool visual of the regional disparities in job growth/loss (ht, hubby!). The data are listed by metropolitan area, not by state (I would rather see it by state). Some cool things can be seen here. Look at California in April 2008: Northern California - San Jose and San Francisco - was still adding jobs, while Southern California - LA and Riverside, housing bubble central - was destroying jobs.

Last week, the press really hammered at the unemployment rate growing to 9.4% - so much so, that it overpowered the more benign news (maybe even good news!) of a far-smaller-than-expected 345,000 drop in the nonfarm payroll.

The slightly more current information is buried in the nonfarm payroll report, which shows a declining pace of job destructiong. I really don't get the reluctance to internalize the "less bad" news: the unemployment rate depends on two things: the number of unemployed and the size labor force (which is unemployed plus employed), which makes it more of a lagged indicator.

In May, the labor force grew for the second consecutive month, +350,000. To be sure, those individuals went straight into the unemployed category, which helped to drive up the unemployment rate. But my point is this: that there will be fluctuations in the labor force that can grow the unemployment rate even after the nonfarm payroll is not falling anymore.

The chart illustrates the change in nonfarm payroll, and the unemployment rate at a 3-month lag (i.e., for each payroll shift, the associated unemployment rate is three months into the future). The correlation among this series is -0.33, while the correlation among the contemporaneous series is just -0.18 (current unemployment rate and current nonfarm payroll change). Shifts in the unemployment rate tend to lag the nonfarm payroll.

The fact that nonfarm payroll declined at a slower pace is a good sign. But don't get your hopes up: initial unemployment claims are well above the level that suggest jobs will be added next month... And furthermore, two economists at the Fed predict a significant "jobless recovery".

Sunday, June 7, 2009

This commercial aired in 2007 and sparked some controversy over the robot contemplating suicide. It is rather prescient, though, starring a robot who is worried about losing his job on the assembly line amid GM's 100,000-mile warranty. It even has a housing aspect, as the robot pictures a life advertising home sales.

But there are likely some supply issues here as well. Consumers are actively paying down debt because they "want to" (i.e., demand side), but likewise, they are being forced to as credit card companies slash credit limits. I have received two notices in the mail just in the last month (or two) that either canceled or reduced the limit on a card due to "inactivity". Think about someone who lost their job and is living off of credit right now - if their credit limit was cut, then they would be forced to pay down or default even if the full intention was to continue spending.

However, the trend is certainly clear: consumer credit is doing something that it hasn't done in a long, long time (ever)....retrenching.

I got a new computer (netbook) and downloaded openoffice - it is okay so far, but that is why my chart is so different. At any rate, the chart illustrates the monthly change in consumer credit (not annualized) since it was first measured in 1943 through April 2009 (I couldn't figure out how to change the axis to show the later dates....oh well, next time). I highlighted the gold standard era (Bretton Woods), which tamed credit growth. And then the move to fiat currency, which provided profit-seeking banks plenty of tools (i.e., printed money) with which to create added credit flow.

Never, since the series was started, have consumers pulled back with such force.

Friday, June 5, 2009

The global economic reports are becoming saturated with signs of a forming bottom. Auto sales in Japan and the US are improving somewhat; exports are dangling in the double-digit loss rates; and GDP really couldn't get much worse (the inventory cycle alone will create some growth). Finally, money growth rates are slowing, perhaps an indication that policy makers feel that the worst is behind us.

The lagging information: Q1 GDP was just awful

Looking behind: Inflation still falling on seriously weak demand in Q4 2008 and Q1 2008, although recent oil swings might throw a wrench in the trend.

Some troubling news still: exports anemic..still. South Korea released its May data on exports (Malaysia, India, Indonesia, and Thailand through April), which stumbled another 8.7% to -28.3% over the year. Not a good sign for May export reports across the rest of Asia.

Good news (possibly): Auto sales in Japan and the US may have troughed. The upward momentum is surely a good sign for consumer spending numbers, but notice sales are still down 19% and 20% over the year!

Finally, money supply growth rates are slowing. In the US and UK, I take this as a sign that central banks are slowing their easing strategies somewhat. However, in the EU, the lack of QE policy allowed M3 growth fall to its slowest annual pace since 2001, 4.9%.